Inside Health

By TYLER COWEN

Published: March 22, 2007

Proponents of single-payer national health insurance note that private health insurance has overhead costs of 10 to 25 percent of expenditures. Medicare, by contrast, has overhead costs of about 2 to 3 percent, and socialized European health care systems generally have low overhead costs as well. That is why single-payer supporters claim that we can save money by substituting government for private insurance. But this would shift overhead costs, not reduce them.

The monitoring, marketing and overhead costs of private insurance are what allow more expensive medical treatments through the door. It is precisely because competing insurance companies spend money evaluating the appropriateness of claims that they are willing to pay for so many heart bypasses, extra tests, private hospital rooms and CT scans.

Medical insurance, whether private or government, is always going to be faced with a fundamental problem: patients and doctors will try to get the most out of any system. When they aren't paying directly, patients will seek extra care and doctors will be happy to oblige. To deal with that problem, health care systems can offer services indiscriminately and write off the resulting losses, spend money on monitoring, or limit services and prices. An analogous problem is faced by retail stores: they must either put up with theft, hire security to limit theft, or carry lower-value items.

Just as some items are harder to shoplift than others, so some medical services are less prone to overuse. European systems are relatively good at providing prenatal care or mending someone hit by a car. Few people would try to get these services unless they were really needed. No one but an expectant mother, for instance, will show up for a prenatal checkup; nor would excess prenatal checkups cost a great deal. The unwillingness of European systems to spend on overhead means they will do best specializing in these kinds of services.

Health insurers cannot just offer expensive tests, technologies, hospital rooms and surgeries for older patients for the taking. Doctors will too often recommend these services and receive reimbursement, even to the point of financial abuse. Medicare has this problem to some extent.

When it comes to these discretionary benefits, European systems are more likely to make people wait for them, more likely to make the service inconvenient or uncomfortable, or simply not make the services available in the first place. All of these features discourage those who don't really need care, and, of course, some people simply go elsewhere and pay out of their own pockets. Either way, the overhead costs have been shifted onto patients and their families.

On average, European systems are relatively good for the young, who are generally healthy and need treatment for obvious accidents and emergencies, with transparent remedies. European systems are less effective for the elderly, the primary demanders of discretionary medical benefits. American society has the reputation of paying less heed to the elderly than Europe does, but when it comes to medical care it is the other way around.

American citizens could, if they wanted, replicate many features of Canadian and European systems, but in the private sector. They, or their employers, could join stringent but cheap managed care plans. Health maintenance organizations were popular 15 years ago, but Americans didn't like being told that they couldn't have a treatment, or that they would have to wait. That experience showed that Americans are willing to pay for insurance company overhead costs, if it means they sometimes get more in return.

Private insurance also provided earlier access to prescription drugs -- an expensive yet effective form of medical care -- for 20 years or more before Medicare did. The competition among private insurers may appear wasteful, but over time it stimulates better and more complete coverage.

Nor are Canadian and European health care systems as cheap as they look. Measuring health care expenditures as a share of national income does not count waiting costs or the lack of availability of many advanced technologies and treatments.

Furthermore, the lower reimbursement rates for doctors and hospitals in Canada and Western Europe save less than first impressions suggest. Bargaining down health care prices won't change the reality that real resources must be devoted to produce care. The true social cost of a doctor is not the doctor's wage, which is simply money passing from one hand to another; the true cost is what the doctor could have produced doing something else. Higher doctors' wages in the United States reflect, in part, the higher return to skilled talent in the more entrepreneurial American economy.

As long as lifestyle, diet, attitude, social standing and exercise are the major determinants of personal health, the expensive American emphasis on discretionary treatment will not always seem sensible. Many people just don't benefit that much from medical care. Look at the life expectancy around the Mediterranean -- it is high but not because of wonderful health care.

But as populations age and the value of medical technology grows, the overhead costs of private insurance will prove an increasingly wise investment. For all its high immediate expenses, the American health care system is looking toward the future rather than the past. In the long run, the hidden and indirect costs of single-payer systems are harder to measure and thus are ultimately harder to control.

Middlemen and marketing costs have long been viewed with suspicion by critics of commerce. But these practices are usually signs of market sophistication, not waste. The gains from abolishing private insurance and its overhead costs are an illusion. TANSTAAFL, or ''There Ain't No Such Thing as a Free Lunch.''